never heard of before like pearl harbor or columbine or syria but let's look at this way i don't exactly know where person's kidneys are or how exactly they work so by all normal logic that means i'm not qualified to have an opinion about whether we should remove john doe's kidneys my opinion doesn't count because i am kidney ignorant so if you know so little about syria that you can't even find it on a map then you are more likely to believe from a guy in a suit on t.v. that there must be an intervention to save the people there you have no idea who they are or why they are suffering or how to save them but gosh started that intervention sounds nice knowing at least where a country is on the map is the first step in building informed opinion but that's just my opinion. hello and welcome to our in the money would have business of russia is business.

where is the russian economy going and do the government and the central bank have a sound growth strategy over the past few months we have witnessed the government change its economic assumptions and policies by one hundred eighty degrees is this a sign of panic or sound judgment. i'm joined by chris we for he is the senior partner with macro advisory and we also have a year or so off we saw volar keys the chief economist at deutsche bank russia ok chris if i can start with you first is the government battening down the hatches because three months ago we saw our spending increased we had we worked on the assumption that the government would continue spending to keep the economy stimulated and now here we are almost in october and we have an october report coming out about what the budget is going to be it's completely reversed why well you know i think the government is looking at is that they're representing stability and you know there's still a great deal of uncertainty in the global economy of course as we've seen with the

the actions of the fed they will they want to kind of come to tapering in of we do expect another round of at least uncertainty and euro zone as the east. is tightening up the budget the right strategy. and i don't believe so i think it's been proven time and time again taking budgets you know is is it might contain stability for a while but the danger is you might even see some refer to retraction and you can be you know historically this is a strategy to say to the i.m.f. as you said many times going to countries in trouble and insisting on budget cuts making the matters worse now you know the thinking is you better off expanding spending but in the right area so i think. well that one and you know the government is now certainly focusing on stability to the winter on to see what the global environment is like perhaps coming into the spring rather than taking risks but also it's quite clear there's a lot of uncertainty as to where the changes in spending show that serve because if you work for a government institution there's a lot of in uncertainty attached to it it was obvious was the right strategy

because again i mean what was there a tipping point for over the last three months that would make the government swing so much because you know talking to economists and people investors and looking at the economy they were assuming that the putin administration would continue with its past policies the last couple years and now this abrupt reverse yes i think one of the factors certainly was the deterioration in tax collection and some of the weakness in the economy that was especially from the second quarter of this year so i think to some degree i would say that the government is playing it safe and is making sure that going forward the budget has enough reserve to deal with potential external shocks to which russia. but at the same time i would say that we're entering into a paradigm a new paradigm of outright cuts that are going to continue and exhort belief or they're down the road i think this is more about increasing efficiency and creasing

you know that's certainly going to carry easily does spending so easy actually my view would be that probably it is possible to combine growth and somewhat lower spending as long as you have more efficient spending more targeted spending in three areas such as especially the social sphere. it seems to me you you mentioned you know when the i.m.f. goes in that paradigm here but russia is not merely in that situation right now i mean it's something specific because we have austerity in europe we have a different kind of austerity we might in the united. it's with the budget battle coming up here but how would you put russia into that because it just seems to me that putin is just skittish about debt and he looks it is a national security issue you know he's made a speech many times over the last twelve years or so he certainly views a high level of debt as leaving a country but i don't she doesn't have high level it doesn't mean he's paranoid

about is you know maybe creeping higher and we'll see the debt level increase but very modestly i think in the next couple of years that's the plan but you know any suggestion to the budget is going to run say four or five percent deficits and then you know build up the debt that's definitely off the cards as long as there's a it's just a result of the one nine hundred ninety s. i mean the you know this is still waste of everyone's mind absolutely i think the trauma that was experienced by the economy by the populace by the society associated with how great the decline was how severe the debt burden at the time was i think that still to some degree feeds this aversion to greater debt within the society and also in the top echelons of power as the a look around they see that still a lot of the developed world is and comfort with tremendous amounts of debt and probably this is still going to be a significant constraint the speed of recovery in the developed world and the speed

of work of we quite frankly of the world economy as a whole so cordingley i think going forward perhaps as investors have a more differentiated view in terms of their preferences they will seek out those countries that have a stronger balance sheet and russia is precisely in this category it has one of the best solvent balance sheets in the world this is this is what putin likes this is for him it's it shows that you know russia is is a stable country it has its its books balanced it's not a indebted country because i think as you pointed out here this is this is something that is almost kind of. psychological here i mean. but you can go around the world so we're a creditor nation in the world we're not a debtor nation and as you pointed out the developed world overall is an intensely indebted to be. in the one hand there is the stability and clearly you know russia looks very relatively very strong in terms of balance sheet the second part of the equation is you know good driving growth you're not going to drive growth just

because you've got a big pile of cash in the balance sheet so now to we're coming into this debate over the budget and where the cuts might come and we're spending might be shuffled around that's going to be critical because again you know sort of pointed out it's where they're spending cuts and where the spending will be ok you know what you guys on the spot where are they going to be minus defense because it looks like they're not going to touch that but where else in this is and to go back to chris's point here i mean stability is the key word here but if you go after too many of these programs it does create instability it has an opposite effect it does in italy clearly russia is a problem right now or i guess when the shoes need to address is the build up of investment we saw a big drop in investment spending last month for example but generally over the years the level of investment in russia is too low there needs to be a big sustained increase in investment to expand you can be to develop new industries such would create diversification and we're not seeing that right now no clearly that's you know the bigger issues to do with you know the lack of

institutional reform you know the perception about corruption legal protections these are much bigger issues that need to be dealt with but in the meantime you know in terms of budget spending the government does need to get this right if they cut spending in the wrong area we're going to see lower growth and possibly an economic crisis second quarter of next to agree on that was very good going really i think ultimately russia will have to find a way to reorient the first goal outlays from social outlays and to investment into infrastructure is the infrastructure ok those are a lot of to do that you need institutional reform you need to have that capability to spend. plea for structure so this is really crunch time now whether russia is capable of doing precisely that. bring in a little closer to home. soon that moscow's getting being is being spruced up for the sochi games ok because of there's a lot of buildings being already refurbished and there's

a man meant to crush the new create new sidewalks i think you've noticed i mean going back to that is this being done efficiently. because you know governments that's not their strongest card but this is has to be a strong card for russia to make sense of everything that both of you just said on this program look far as i can see we're at a transition point a very important transition point and if you look we've expanded out a bit you could say you know in two thousand and eight putin's previous two terms it was all about the oil wealth coming into you can be trickling down creating the consumer boom and cetera then we had prices years or nine until say relatively or argued be still but in the last four or five years it's all been about just containing the domestic situation in the face of global uncertainty but now it's very obvious that russia in order to achieve the growth clearly it needs which is more like five percent sustainable growth we're going to have to have a new driver and new growth driver must be investment so we're at the point where

you must be investment that is going to help us with the i think you know we're at the point now where i think there's much greater awareness of what needs to be done and what the consequences of not getting it right are there's a lot of planning going on it can't say today to they're doing it right or wrong what you can say is we're at the point of you know there's a better understanding to does need to happen we see some initiatives for example with the russia direct investment fund and a couple of weeks ago for example the government of abu dhabi announced they were going to commit five billion dollars to infrastructure so there is the right noises so far but it's far too early yet to be either confident or cynical to this is going to be a waste of time over the next couple of years we'll know. but clearly it will only work money and attracting money from the likes of abu dhabi is one thing but the institutional reform to make it happen efficiently to make sure that money is spent and not wasted or stolen that's going to be key so getting money is part of it making sure that money is deployed efficiently will be the bigger challenge or at the start of the process i think there's also the clear eagerness on the part of

the authorities to work with the private sector in improving the fiscal framework and terms of infrastructure projects we're seeing that the ministry of finance is very active and looking at specific projects and looking at imposing conditionality and looking at how monitoring could be improved in order to raise the efficiency of investment projects so i think now my view there is a far. far greater awareness far greater emphasis on how to render this push investment push more efficient more targeted. what you think the budget is going to look like first world think it. but i can say is that i believe that whatever proposals we see over first the final version will look different i think this is the you know the debate the budget to revise budget i think that would be

to start of the negotiations and clearly the stronger ministries with greater love being power as we saw earlier this year would privatisation complete change those who have got the lobbying power into political muscle you know tend to come out of this much more favorably so what i'm hoping of course what i'd love to see is you know a big cut in defense spending going to see you know your negativity about it like to see money going into the social sphere into areas that you know can can can sustain consumer activity and that's true but i think this is one thing for office in the middle of. a very difficult to get a. break we'll continue our discussion on russia's economy state with already.

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welcome back to on the money where the business of russia is business i'm peter all about we're talking about russia's economy and government strategy but before we continue our discussion let's have a look at this report. production levels in russia have surpassed be crisis figures this is quite an impressive accomplishment compared to the other g eight economies the u.s. and germany are only nearing pre-crisis production levels while france and italy still lag far behind the brics countries are in the lead china having doubled its two thousand and seven figures and india expanded its production by over thirty percent for russia the current industrial production index exceeded that of two thousand and seven by six percent manufacturing of consumer goods has been

expanding in the last months especially clothes and shoes as well as plastic paper and rubber goods however this growth is offset by a slowing production of such important sectors as electric power and engineering investment activity in russia has also slowed still average supply of capital goods over the last three months is eight percent higher than in two thousand and eight in particular car imports figures are much higher than before the crisis as for the state budget it was marked by a sound performance in the second quarter of twenty thirteen russia's budget surplus amounted to two point three percent of g.d.p. nevertheless analysts expect a short fall in revenues toward the end of the year this cursed pons with the government's preparations to reduce spending president putin called for a growth oriented budgets with them but at the same time has asked for cuts in spending too much the budget incomes according to putin the high debt load is an

issue of national security if nothing is done by. twenty fourteen our country will face certain deficit next year it will be more serious than even more than that and in the end we will find ourselves in a very difficult situation if we are responsible if we want to feel confident probably a bit more modest during a certain period of our life but nevertheless be sure that nothing collapses blasts or falls apart then we should act carefully and professionally a stability course was the highlight of the russian president's budget message in june i revised budget for the next three years is expected on october first lisa lookin on the money r t. ok chris let's continue with the russian economy on the back of this report here can you have a stability budget and still have a productive good high productivity because it seems to be kind of a binary here mr. has offered alternatives to the current strategy of the

government does it make sense to you you can for a while you know clearly you can into the for a period of months over the winter in emphasizing stability shouldn't do that much damage does that work in terms of growth but you know the danger is of course you get hooked on stability you know everybody refers back to the brezhnev area search over stability you know gradually became stagnation and we you know we the last decade or more saw that fear is still in everybody's mind to the government just gets stuck in this mindset of stability and doesn't take the risks in terms of the right spending or efficiency or investment policies etc then you know we'll end up in this low growth environment for far too long when we clearly need initiatives to drag up investment on the radio and sometimes those decisions are painful as in any economy and i get in that becomes a political issue here it does have a point in many ways in looking at you know you know making stability the be all

and end all of everything in doesn't necessarily create a. growth and he was right in two thousand and eight mr coogan was right then because if russia spent all of its oil windfall at the time to develop some big projects and lost a lot of the money at the time the economy would be very overheated and going into the crisis. there would be a tremendous correction even greater than the one we had in two thousand and eight two thousand and nine and it will really quite minor compared to what happened in western developed countries and which was certainly far more smooth i would say interims of the social implications for the wider strata of the population compared to what we had in one thousand nine hundred eight because there were these reserves that were used for the benefit of the broader public so i think that kind of strategy was validated then and it will continue at least to some degree to loom large and to be very significant in terms of the strategic view of the russian

authorities but one other point i wanted to make is that we shouldn't solely focus on the budget situation when looking at the potential efficiency improvements one major area which is frequently overlooked is of course the corporate sector including russia state companies and i think in terms of forging ahead with better corporate governance and terms of controlling costs far better than they used to do before i think this is clearly one of the top priorities for the next several years . or so brings up a good point because we keep talking about what the state is doing with the the corporate sector is an enormous amount of responsibility as well sure of course a big chunk of the industrial base is state controlled right is linked to this state for another so we have tended in the past to lump the two together and the kind of non-state part of the industrial base is certainly growing it hasn't been significant in the past but it's becoming more significant the likes of companies

like mike need to all have very you comparably know. valuations to similar companies in the rest of the world because they're regarded as a new generation of russian companies could corporate governance behaving well performing well so is that group we're back to the same question again we have the short term issue of what's going to happen economy over the next six to nine months what the issues are but the bigger picture of course is just the development of of the economy of the corporate base in other words the state taking a step back and letting the corporate world and entrepreneurs get on with this i mean that's clearly you know we need to see. that we are talking about two paradigms of development this is the juncture which russia is facing right now whether this is modernization with big projects being pursued and this being essentially state led largely or is this bottoms up process of liberalizing the business regime for all of the companies and making it

a level playing field in order for the economy to muster greater generate greater going forward in a more sustainable way these are the two different views that i think currently are battling will go to bed fellows we can't be getting we're going to efficiency you product if this state is more efficient in spending in developing these big projects which clearly need to happen then don't yet that could be a major driver and create a very attractive backdrop of a where for the you know for the more entrepreneurial expansion that you can to me i mean we you know i think it is clear again using words like it different this time the flow most expensive or not. but it is important though to look at the firies stages in russia we had the ninety's then we had the you know two thousand two thousand and eight to me for the crisis we're now at the treasurer all of a new phase now it could go badly wrong it could end up being just flat lining or it could be to start of something interesting but what is interesting right now is

there is a much more open debate. and much greater acknowledgement of what needs to be done and it's much more politicized i think we all have to admit that or i want to change gears a little bit. do the ring in capering. quantitative easing explain it to me what's going on can't it's extraordinary the way the fed has behaved over the summer making the announcement as did it in may and then not following through and you know again as you used the word discerning i think it's as good a word is there any to say to describe what i took from your report. is that what they've been doing for you know for the last several months and of course was we can no no it's created a great deal of uncertainty particularly in emerging market world and a lot of volatility in emerging market equities and so it is that they're afraid of letting go of cheap credit i mean that's what it looks like to me and that's an intensely political issue and there are the emerging market countries that are you know getting sick and tired of importing somebody else's inflation that's the whole

thing about. the world economy in the developed world that a lot of it is being bred by cheap money and there's a certain dependence on the part of the whole system. yeah to that kind of cheap money continuing to come from the from the european central bank etc and that means that apart from the sheer quantity of gold there is also the question of quality of course and the quality is not really there because most of the growth momentum still has to depend on cheap money coming still from from the regulators angle merkel's back ok if you're going to get tough on the euro zone i would expect what we've heard from her so far is you know policies will remain as before no major change my assumption is that that's just doesn't just holding statements on to the coalition and gets in place but we already know to d.c. be preparing to get much tougher on the eurozone banks to bring all of the regions

banks into. line which for example the definition of bad debts for example in germany ninety days plus that's a bad debt initially hundred twenty days plus so bring in you know the banks into line could reveal some more nasties and more require more bailouts so i think it's a reasonable expectation to say that we're going to have more volatility and some concerns in the euro zone over over the winter and that combination of. dithering of the part of the fed the uncertainty of the creators and what we're likely to see maybe a move to clean house and take more decisive action in europe in that sense you could say difficult to argue way. emphasizing stability is the exact way to get out i think you know the euro zone that we need still very needed. a stiff hard and absolutely whole problem with europe throughout the past several years i think was precisely the lack of sticking to rules so essentially the european union was predicated on the set of criteria

a set of rules that countries have to abide by and a lot of the crisis that we saw recently in the past several years was precisely due to the fact that while europe was talking about the need for a lot of the other countries to follow all these fiscal rules and all of the other rules a lot of its countries were not following through on what songs about rules were also to go in the budget battle and on capitol hill another big another big headache probably don't markets are not pricing in anything be assumed to be a lot of brinkmanship where you go to midnight and then there's a bit of slippage here and there but it basically investors assume deals will be done nobody will want the consequences and our view is that at the very last moment there will be a deal but at the very last minute and i only after a lot although it's not leaving it we're just i mean the world's not leaving very well when it gets down to that we're out of time gentlemen many thanks to my guests here and thanks to our viewers for watching us here on on the money see you next time stay with.

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